Riot Blockchain, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; this is an annual report, not a standalone fourth-quarter filing. Financial comparisons are with FY2016. The company changed its name from Bioptix, Inc. in October 2017 and shifted from legacy life-sciences activities toward cryptocurrency mining and blockchain investments.
Business context and financial results
Riot’s new strategy was in its early stages at year-end. It acquired Kairos in November 2017, which owned 1,200 miners, and began recording cryptocurrency-mining revenue. It also held an approximately 10.9% interest in Coinsquare and acquired a 52% interest in Tess. Most prior business results were classified as discontinued operations.
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $269,657 | $96,699 |
| Cryptocurrency-mining revenue | $172,959 | None reported |
| Operating loss from continuing operations | $13.15 million | $5.19 million |
| Loss from continuing operations | $16.43 million | $3.16 million |
| Net loss | $19.97 million | $4.27 million |
| Cash used in operating activities | $4.44 million | $5.52 million |
Total revenue comprised mining revenue and approximately $96,700 of amortized legacy license revenue. Comparability is limited: FY2016 revenue from the discontinued business was reclassified, and mining operations began only in late 2017. FY2017 SG&A rose 65% to $7.29 million. A $5.22 million impairment of mining equipment reflected lower bitcoin values at year-end; discontinued operations also recorded a $2.75 million impairment.
Financial position and liquidity
- At December 31, 2017, cash and cash equivalents were $41.65 million, working capital was $41.35 million, total assets were $52.34 million, and total stockholders’ equity was $48.87 million. Cash was $5.53 million at year-end 2016.
- Total liabilities were $2.71 million, including $135,574 of current notes and other obligations and $1.07 million of deferred revenue. The $4.75 million convertible notes had converted into preferred stock during 2017; reported interest expense of $4.81 million largely reflected noncash debt-discount and warrant accretion.
- Operating cash outflow was partly offset by $34.98 million of financing cash inflows, principally from common-stock sales and convertible-note proceeds. The company paid a special cash dividend of approximately $9.56 million.
- Management stated that available working capital was expected to cover estimated cash needs for at least a year and a day from the filing date, while warning that operating losses were expected to continue.
Material changes, outlook, and risks
- Expansion after year-end: In February 2018, Riot acquired 6,800 additional miners for $19.5 million cash plus 1 million shares, and paid $4 million for a 12-month deployment and operations consulting agreement. It also acquired 500 bitcoins in January for approximately $5.63 million.
- Facility and stated capacity: A February 2018 Oklahoma City lease was amended to provide up to 12 MW, with rent increasing to approximately $665,760 per month when the additional capacity became available. Management estimated that 8,000 miners at full deployment could produce more than 110 PH/s; as of March 31, 2018, approximately 3,500 miners were operating. These are estimates, not realized results.
- Further strategic plans: The company planned to expand mining, evaluate blockchain investments, and investigate a U.S. digital-asset exchange. In March 2018, it acquired 92.5% of Logical Brokerage, a CFTC-registered introducing broker; an exchange launch was not assured.
- Regulatory and legal matters: Riot disclosed SEC staff inquiries concerning possible Investment Company Act status and an SEC subpoena received April 9, 2018. Securities class actions and a shareholder derivative action alleged misleading disclosures; the company denied wrongdoing and intended to defend itself. The filing does not quantify potential losses.
- Other material risks: The filing emphasizes cryptocurrency price volatility, mining difficulty and reward changes, electricity availability and cost, hardware supply and obsolescence, cybersecurity and custody, evolving regulation, financing needs, and the possibility that the strategy may never become profitable. The company also disclosed NASDAQ listing-compliance risk tied to holding its annual shareholder meeting.
- Unusual items and accounting: Riot recognized mining coins at fair value and remeasured them at reporting dates, while acknowledging limited authoritative accounting guidance for digital assets. The auditor issued an unqualified opinion on the financial statements; the auditor did not express an opinion on internal-control effectiveness. Management stated its controls were effective.
Important facts for investors to verify
- Actual miner deployment, uptime, hash rate, bitcoin production, and unit economics relative to power, rent, equipment, and consulting costs.
- Cash burn and liquidity after the post-year-end bitcoin and miner purchases, lease expansion, consulting payment, and subsequent investments.
- Regulatory developments arising from the SEC subpoena and inquiries, including any effect on Investment Company Act status or planned exchange activities.
- Progress and financial impact of litigation, related-party transactions, and NASDAQ meeting and listing requirements.
- Whether mining-asset impairment assumptions, digital-currency valuation practices, and potential equipment replacement costs remain appropriate.